Invest Like the Best with Patrick O'Shaughnessy
00:11:00 · Patrick O'Shaughnessy, Gavin Baker
[00:11:00] S0: was blowing [00:11:00] S2: out All of these CD-- uh, it's CDS for everybody is, is blowing out, and, you know, very smart private capital people just like, "Hey, this is just exactly what you'd expect, these are just banks hedging their commitments, but nonetheless, it doesn't look good," and these are undeniable facts. CDS is up, spreads widened, real yields are up. That would be really, really scary if we needed debt to finance this build out. And that's where I think it's this differential between spot and contract Pricing for the installed base of compute is so important. [00:11:34] S0: It's so important to understand what the financing will be like for the next six months or something. [00:11:39] S2: The degree to which this build out [00:11:43] S0: is going to require credit. Right. Which would be the classic capital cycle. Absolutely. Overextend ourselves with debt, and that's where things get stuck.
00:11:50 · Gavin Baker
[00:11:50] S2: A hundred percent. And then debt-fueled build outs, they demand immediate repayment. So if supply and demand get a little bit out of whack, things can unwind very, very quickly. That's what happened in the internet. If one believes, as I do, rightly or wrongly, after this month, I'm super open, you know, I'm, I'm looking like I've been pressure testing all of these and like I really went deep on credit because, hey, this is real, it's undeniable, and if we need credit to fund this build out, this is a significant negative. And if you model it out, if you look at the amount of gigawatts that are supposed to come on in consensus estimates for hyperscalers, they're a Effectively modeled, and these are gigawatts of Blackwell and Reuben, Reuben being Nvidia's next chip, Blackwell being the current chip, they are essentially modeled to monetize roughly at the rate of Ampere, which is two generations behind, not at Hopper, but Ampere. So there's one point three to one point four trillion in hyperscale operating cash flow If you just assume, I think it's very unlikely they monetize at the rate of a MPR, we could go into why. Some of it comes from just seeing what is happening on the ground with demand here for real quantitative metrics. But like, let's just say they monetize at a discount to current Blackwell's, then it's more like two trillion of operating cash flow, and that kind of takes seven hundred billion of credit demand out Ironically, as that improves all the credit ratios, as these installed bases of compute reprice, we're gonna continue accelerating, because since this is modeling a deceleration, which I think is unlikely, then the credit metrics look better, and then all of a sudden, it gets easier to finance with credit. Now, whether they choose to do that or not, we'll see. This is all a little bit, you know, I think we spoke- Two months
00:13:44 · Patrick O'Shaughnessy
[00:13:44] S0: ago.
00:13:44 · Gavin Baker
[00:13:44] S2: No, but the time before that about kind of the risks of a blackwell air pocket. Oh, yeah. Where you're spending hundreds of billions of dollars on blackwells. They're mostly being used for trading initially. Trading doesn't generate a return. This could be a risk. We actually really saw that in the first quarter. I think one reason to the podcast two months ago, I got comfortable with that risk was just that you were seeing such incredible things out of Anthropic. And then it's like, okay, well, the market's kind of gonna look past this, and it did look past it in April, in May, in June, and then in July because of this kind of confluence of things, stopped looking past it. Just as the operating cash flow started to really accelerate, and this is just a fact, it is accelerating at big scale. You know, like Microsoft, they brought on a huge slug of capacity in the month of June that didn't even show up In the second quarter. So essentially what this all comes down to is, do you believe that the quantitative demand signals Seeing on the ground here in Silicon Valley, from private companies, are going to continue, such that the installed base of compute re-prices higher as contracts roll off, operating cash flows go up, and you can fund most of this out of operating cash flows, maybe all of it. Like if it re-prices at current rates. You could probably fund all of it for the next several years. It has been a very unusual episode in the market. We should talk about what the fundamentals are that are getting better that I'm talking about. Technicians would say it's actually in '22, okay, the market is worried about a recession, rates going up, inflation, that's what the market was worried about in '22. You knew exactly what it was, okay, DeepSeek, you know what it's worried about. Liberation Day, you know what it's worried about. There's something very clear. And in, in a weird way, that's comforting. It is, sure. And here, you know, we talked about a lot of specific things, but it just feels all those specific things, with the exception of credit, are just kind of ridiculous. And so the fact that it is still going down, a technician would say, "Hey, that's, that's a little scary." But it's definitely the bullet you don't see that gets you.
00:16:04 · Gavin Baker, Patrick O'Shaughnessy
You know, I think we've talked before about how, like, I think the three most important words in investing aren't margin of safety, but I don't know. But just, you've been out here for two months, I've been out here, I literally spoke to a company this morning who rented a cluster of several, and this is one of the second- See as startups that people wanna be in business with, and they had rented a cluster of several thousand blackwells, and we'll just call it somewhere in the mid two dollars per GPU hour. They're renting the exact same size cluster, essentially identical in every way, B200, no differences, and they're hoping seven months later to pay just under four dollars today. Like that's pretty crazy, because again, you would expect a really gentle decline in prices would be bullish. Instead, we're up, depending on the starting point, fifty to sixty percent in six or seven months. There have been so many anecdotes like that. Like I think one of the Infras Clouds, I think it was based in, I'm not sure, they went on a podcast and they essentially said, "We are planning to pay one hundred percent more for Blackwells when our contract expires." And that just means that essentially all the hyperscalers are under-earning. My main kind of mission out here this week is like, [00:17:23] S0: pressure test. [00:17:24] S2: Yeah, yeah. Tell me something negative. Like, you know, the question I asked you, is there one negative quantitative metric you've heard has been what I've been asking everyone?
00:17:24 · Gavin Baker, Patrick O'Shaughnessy
[00:17:24] S2: Yeah, yeah. Tell me something negative. Like, you know, the question I asked you, is there one negative quantitative metric you've heard has been what I've been asking everyone? [00:17:35] S0: The main thing people are saying is the third-party data suggests that the anthropic curve started to go off of its trajectory a little bit. That's like the only thing that I- I [00:17:43] S2: think that may very well be true, but then you- We have OpenAI and open source massively accelerating, yeah, the competition, and if you look at the sum, it isn't accelerating. Like I think open source is a little bit of, um, you know, they talk about dark matter in the universe, like open source is kind of dark matter to the public markets It's hard for public markets to measure it, but like if you just track what these inference clouds are saying, people saying things on podcasts or people saying things in meetings, they're not audited financials. Demand is clearly accelerating, which makes sense, 'cause you had this huge capability leap with GM five point two and KVK three, which I think we're gonna see continue. I think you're gonna see Nvidia bring Neutron steadily closer to the frontier. But man, it has been a humbling, challenging month, and but just, it's also like, wow, I've kind of pressure tested every assumption. The underlying fundamentals are improving. Nvidia is actually, as we record this, at its lowest forward PE of the last ten years. Crazy. The only time the cibes have been cheaper were Liberation Day, DeepSeek, those were kind of V bottoms.